Double-entry book-keeping

Double-entry book-keeping is the standard accounting practice for recording financial transactions. It was invented by Luca Pacioli, a close friend of Leonardo da Vinci.

The system is based on the concept that every transaction has a 'dual effect.' This is illustrated below.

Buying an asset;

Effect 1; The volume of fixed assets in the business increases.

Effect 2; The level of cash is reduced.

Selling stock on credit;

Effect 1; The number of trade debtors for the business increases.

Effect 2; The level of stock is reduced.

Paying a trade creditor;

Effect 1; The number of creditors for the business is reduced.

Effect 2; The amount of cash in the business is reduced.

For each transaction there will be a debit and a credit. An increase in any of the following will result in a debit:

1. Debtors: entities who owe you money
2. Drawings
3. Expenses
4. Assets
5. Losses

An increase in any of the following will result in a credit:

1. Creditors: entities who you owe money
2. Liabilities
3. Income
4. Profit

An increase in a 'debit item,' must be accompanied by either an increase in a credit item, or a decrease in another debit item. An increase in a credit item must be accompanied by either an increase in a debit item or a decrease in another credit item.

Credit and debit items are later summarised in a balance sheet and a profit and loss account.